A Bank That Lived to Tell the Tale

Published: November 1, 1992

(Page 2 of 3)

For his part, Shawmut's Mr. Alvord says "the pendulum swung too far in both directions," with bankers failing to curb rash lending in the mid-1980's and regulators reacting with overly harsh treatment in 1990.

Mr. Alvord, who is 53, came to the fore during the real estate bust of the mid-1970's, when he was put in charge of Connecticut National Bank's sour loans to real estate investment trusts. His success with those loans helped make him president of Connecticut National in 1978. When the bank merged with Shawmut in 1988, Mr. Alvord was named chairman of the new company.

Yet even with that background, he was unable to avoid the real estate pitfalls of the 1980's.

Although Shawmut and Connecticut National stopped making new lending commitments to real estate developers in 1988, their outstanding real estate loans still accounted for more than 25 percent of their total loans in 1990, or more than twice the average rate for banks their size.

Because Shawmut's most serious problems were the result of bad loans, its lending operation quickly got extra attention. To solve the mistakes of the past, Mr. Alvord assigned about 500 people to do little else but work with troubled borrowers and foreclosed real estate.

To avoid making the same mistakes in the future, Shawmut tightened its lending rules and, last February, hired David L. Eyles, a lending expert with 30 years' experience at Chemical Bank and Mellon Bank, to fill the new position of chief credit officer.

Mr. Eyles is now pushing many business borrowers to provide the bank with audited financial statements, rather than a set of books prepared by the borrower with no outside review. On another tack, he insists that a borrower's internal covenants -- promises it made to the bank about maintaining its financial condition -- should be put in writing and checked periodically. 'Infernal' Covenants

"I know that some of our lenders are talking about Eyles's 'infernal' covenants, but I don't care," Mr. Eyles said. "At least they are talking about credit issues."

A key part of Mr. Eyles's job is to develop uniform standards for measuring loans that coincide with those used by Federal examiners. This would eliminate surprises like the one in 1990, when examiners told the bank it had $1.05 billion of troubled loans, not $535.6 million, as it thought.

With uniform standards, for example, a 5-rated loan (a middle-of-the-road rating for small and medium-sized businesses that are Shawmut's bread and butter) would be reviewed quarterly, while a higher-quality 2-rated loan would be checked only once a year.

The ratings can also point to trends. Mr. Eyles noted, for instance, that loans that drop to 5 from 2 are much more likely to cause a loss than those consistently rated 5.

Such precision is a far cry from the lending practices of the 1980's. "The competitive landscape is much different now, with fewer players and a much more rational market," Mr. Alvord said. The 80's were marked, he said, by "an irrational pattern of pricing and credit standards that went beyond the limits of banking."

But while a few dozen large banks across the country are now far advanced in numerical ratings of loans, much work remains to be done.

In theory, the next step is to use the ratings to set appropriate prices for different customers. For example, a loan to a 2-rated borrower might have a lower interest rate than a loan to a 5-rated borrower.

But only a handful of banks, Shawmut not among them, have made the investment in a system to keep track of all business ties to a customer, and how much profit each produces. A bank that provides a company with cash management and financial advice for mergers could afford to charge a lower rate on a loan than another bank that had no connection to the company except the loan.

While bad lending decisions brought Shawmut to its knees, its consumer business -- operating through 330 branches -- has been a mainstay keeping the company alive. Though third in size overall in New England, Shawmut has the biggest consumer operation in Connecticut and in Massachusetts.

Shawmut has not tried to be a leader in new ventures like banking at home or debit cards. Instead, it has built a solid reputation for its early offering of such humdrum products as consolidated account statements and home-equity loans. Pushing New Services

Like many other bankers, Mr. Alvord is looking to wring more profit out of the consumer business by offering new services and investments through Shawmut's expensive-to-maintain branch network.

"Joel saw in the mid-1980's that there was money to be made in consumer banking, even though that was not really a big part of tradition at the bank," said Eileen S. Kraus, executive vice president for community banking.

Like many bankers, Ms. Kraus and Mr. Alvord say the nature of consumer banking is changing, with more demand from customers for help in managing their money. The demand for mutual funds and other investment vehicles is more than just a temporary reaction to low rates on deposits, bankers say. As the baby boomers grow older and become middle-aged savers, banks expect slower growth in lending but more growth in money management services.